Tulsyan NEC Ltd Management Discussions.

I. INDUSTRY STRUCTURE AND DEVELOPMENTS

The Companys products are TMT Bars, Sponge Iron, Billets and Ingots in the steel division and in synthetic division it is PP Woven Sacks, FIBC and Woven Fabric. TMT Bars are used in the Construction Sector and the plastic products cater to the packaging needs of various industries such as Cement, Fertilizers, Food grains, Sugar, etc.

The raw materials for Steel Making are M.S. Scrap, Sponge Iron and for TMT Bars is Billets. PP Granules is used for manufacture of plastic packaging products. This raw material is available in abundance within the country and can also be freely imported. Being in the commodity market the company is continuously making efforts for reducing the cost of production to sustain its margins.

STEEL INDUSTRY

• Global crude steel production in 2019 saw a growth of 3.4% over 2018 to reach 1,869.69 MnT. This increase was primarily due to the growth in steel consumption in infrastructure, manufacturing, and equipment sectors. The automotive production trended down across most countries over the second half of 2019 which had an impact on the steel demand towards the end of the year.

• The World Steel Association (worldsteel) forecasts steel demand to decline by 6.4% y-o-y to 1,654 MnT in CY 2020, due to the COVID-19 impact. However, it has asserted that the global steel demand could rebound to 1,717 MnT in CY 2021 and witness a 3.8% rise on a y-o-y basis. The forecast assumes that lockdown measures will be eased by June and July, with social distancing continuing and major steelmaking countries not witnessing a second wave of the pandemic.

• India was the worlds second-largest steel producer with production standing at 111.245 MnT crude steel in 2019 with growth rate 1.8% over corresponding period in the last year.

• India is also the largest producer of Direct Reduced Iron (DRI) or Sponge Iron in the world in 2019 producing 36.86 MnT Sponge Iron with growth rate 7.7% over the corresponding period last year.

• Further, India became the second-largest consumer of finished steel products in the world, surpassing the US in CY 2019. While steel demand remained relatively strong, the country faced significant downside risks due to broader global uncertainty and tighter environmental regulations. Growth in the construction sector weakened due to falling investments in fixed asset formation. Sharp fall in the private consumption led to weaker growth in automotive and consumer durables. The tighter liquidity conditions due to defaults in NBFC sector impacted credit availability. The automotive sector was also impacted by factors such as regulatory changes, rise in ownership cost, and shared economy while, the capital goods sector continued to remain weak due to the decreasing output and stagnant investment in the manufacturing sector.

• One of the designated core industries, steel is key to the governments focus on driving growth in the infrastructure segment. Towards this end, the following initiatives have been rolled out in support of the steel industry:

• Implemented Steel Import Monitoring System (SIMS), which aids in monitoring real-time import data on quantity, quality and value; the system helps detect misclassification and mis-declaration regarding over/ under-invoicing, preventing import of defective steel, Imposed antidumping duty on galvalume products, ranging from US$ 28-200/tonne; imports from China, South Korea and Vietnam are subject to duties.

• To ensure iron ore availability for domestic manufacturing, it introduced a 30% export duty on export of high grade iron ore (lumps and fines).

• Other measures are underway like the proposed steel scrap policy, safety codes, proposal to reduce royalty to 5% on low grade iron ore fines; Remission of Duties or Taxes on Export Products (RoDTEP) to replace existing Merchandise Export from India Scheme (MEIS); and engagement with international agencies to promote steel intensive design for roads, bridges and commercial and residential housing.

• Ministry of Steel has recently amended the Domestically Manufactured Iron & Steel Products Policy (DMI&SP) in order to increase domestic sourcing of iron & steel products by Central Government agencies.

• The National Infrastructure Pipeline (NIP) is a noteworthy government initiative, which holds tremendous promises for the steel sectors growth. The NIP announced an investment of Rs.102 lakh crore by FY 2024-25, of which roads, energy and urbanisation will contribute 60% of the total infrastructure build. For FY 2020-21, infrastructure spending is estimated at Rs.19.5 lakh crore, up 43% from Rs.13.5 lakh crore for FY 2019-20.

STEEL PRODUCTION:

Listed below is a snapshot of Indian steel industrys performance in 2019-20 based on provisional data released by the Joint Plant Committee (JPC) with growth rates compared to 2018-19

• Crude steel production declined by 1.5% y-o-y to 109.22 MnT in FY 2019-20, with a sharp contraction of 20% in March 2020 due to COVID-19 containment measures.

• Finished steel production grew 0.8% y-o-y to 102.06 MnT; non-alloy steel accounted for 96% (up from 93%), or 97.66 MnT, while alloy steel contributed the balance 4.4 MnT

• In the non-alloy, non-flat finished steel segment, bars and rods grew by 3.6% y-o-y to 40.48 MnT, whereas in non-alloy flats, HRC grew by 2.6% y-o-y to 43.29 MnT

• India remained a net exporter of finished steel during FY 2019-20, with exports of 8.36 MnT, up 31.4% y-o-y. Non-alloy HRC was the most exported product at 4.82 MnT, while bars and rods led the non-alloy, non-flat segment exports with 0.51 MnT Meanwhile, India imported 6.77 MnT of finished steel, down 13.6% y-o-y, with non-alloy HRC accounting for 34% of the total imports. Imports from Korea accounted for 40% of the total imports.

(Source: Ministry of Steel)

POWER:

Financial year 2019-20 remained a subdued year for Indias power sector. Power demand grew at a rate of just about 1% y-o-y, largely reflecting slowdown in the economy. From September 2019 onwards, the electricity prices in short term market declined sharply, with overall average yearly decline in spot prices of about 20%.

The thermal generation sector experienced suboptimal utilization of installed capacity with aggregate Plant Load Factor (PLF) languishing at about 54%, and a large capacity stranded for want of Power Purchase

Agreements (PPAs) or non availability of fuel. Additions to renewable generation capacity supplying electricity at lower prices continued to hurt the prospects of thermal generation. This situation was further exacerbated by Discoms unwilling to commit to long term capacity based contracts.

Several reforms have been announced over the years for improving the position of State Discoms. These reforms, after some initial success, have not been able to sustain for various reasons; the financial and operating performance at State Discoms did not show any significant improvement during the year and in fact deteriorated in some of the weak State Discoms. They continue to be plagued with excessive Aggregate Technical & Commercial (AT&C) losses, distorted tariff structures not reflective of cost of supply, poor payment records and disputes with generation companies, under investment in infrastructure and poor customer service. Many of the struggling State Discoms regularly resort to load shedding which in turn hurts not only the consumer but also other stakeholders in the value chain.

The Central Government has recently announced privatisation of electricity distribution in Union Territories and penalising inefficient operations and non-availability of power. These reforms, if implemented with zeal, will go a long way in improving the distribution segment which in turn will also ensure to the benefit of generation and transmission segments.

The year ended with all round massive disruptions caused by COVID-19 pandemic. While the impact in FY 2019-20 was limited to a catastrophic immediate fall in demand in the last week of March 2020, the pandemic is expected to have deep and lasting impact on the economy, businesses and social setup generally.

As of the date of this report, the situation is evolving with no clear visibility on the extent and timing of impact on business. This will muddy the already poor investment climate in the sector and further slowdown the flow of new investments in the sector. The sector already grappling with several impediments faces the most challenging FY 21 ahead.

DEMAND AND SUPPLY:

The Demand Supply position improved substantially since last 3 years and currently the availability capacity is equivalent to the demand as may be observed from the table below. Increased supply position has resulted in reduction of the realization per unit and also regulatory restrictions and levies such as Cross subsidy have impacted the margins and the realization.

Year Requirement Availability Surplus (+) Deficits (-)
(MU) (MU) (MU) (%)
2009-2010 8,30,594 7,46,644 -83,950 -10.1
2010-2011 8,61,591 7,88,355 -73,236 -8.5
2011-2012 9,37,199 8,57,886 -79,313 -8.5
2012-2013 9,95,557 9,08,652 -86,905 -8.7
2013-2014 10,20,257 9,59,829 -42,428 -4.2
2014-2015 10,68,923 10,30,785 -38,138 -3.6
2015-2016 11,14,408 10,90,850 -23,558 -2.1
2016-2017 11,42,929 11,35,334 -7,595 -0.7
2017-2018 12,13,326 12,04,697 -8,629 -0.7
2018-2019 12,74,595 12,67,526 -7,070 -0.6
2019-2020 12,91,010 12,84,444 -6,566 -0.5

(Source: Ministry of Power and Energy)

II. OPPORTUNITIES AND THREATS

The present situation offers both an opportunity and threats in respect of profitability in as much as it improves the profitability in steel production benefiting from the lower power costs subject however, to sustainable demand for the steel. With no new investments in the power sector in the last 3/4 years is expected to bring about the demand and improve the operations.

Steel prices which saw an upswing after imposition of Minimum Import prices and have subsequently stabilized. Cost of raw materials also have declined in respect of steel which have moved in tandem with the prices of the finished steel thus keeping the margins reasonably at the same levels.

On one hand, the COVID-19 situation added on to the prevailing roadblocks in the form of liquidity crunch, extended monsoons and overall conservatism. On the other, the re-emergence of the countrys incumbent leadership, post the general elections, ensures policy continuity and concerted action for the nations development. The Company is looking forward to the implementation of the National Infrastructure Pipeline, which will go a long way in spurring demand.

The State of Tamil Nadu, which did not increase the power tariff for more than 3 years now may not be able to sustain and thus is likely to increase the industrial tariff anytime soon. Such increase will give an opportunity for the Company to increase the tariff and will lead to improved profitability.

III. SEGMENT-WISE/ PRODUCT-WISE PERFORMANCE

The production of steel rods was 132227 MT compared to 140625 MT in the previous year which showed a decline of 6.35%. The sale of rods during the year was declined from 134909 MT in the previous year to 133692 MT in the current financial year.

The production of power was 4401.50 Lac units compared to 4526.44 Lac units in the previous year registering a decline of 2.76%.

The production of synthetic products was 7180 MT compared to 7599 MT in the previous year. The sale of synthetic products during the year was 6191 MT compared to 5982 in the previous year registering a growth of 3.49%.

IV. OUTLOOK

Just as CY 2020 started on a good note with the US and China reaching phase-1 agreement and uncertainty around Brexit waning, the world was hit hard by the COVID-19 pandemic. The virus spread rapidly across the world, compelling governments to impose national lockdowns to break the chain of transmission, which brought economic activities to a near halt.

However, a few bright spots have emerged. Timely actions and significant stimulus measures have somewhat cushioned the blow. Several central banks have also adopted quantitative easing and scaled asset purchases to infuse liquidity. Oil prices have remained stable, and emerging market currencies have strengthened against the dollar, which point to stabilisation.

Further, the Governments vision to achieve a $5 trillion economy by 2024 entails investments in several steel intensive sectors like infrastructure, housing for all, 100% electrification, piped water for all, etc. Supported by the government stimulus, recovery in construction will be led by infrastructure investment such as railways. The demand in India will rebound by 15 per cent in 2021, it said. The growth potential for the sector is thus immense and the domestic steel consumption will increase significantly in line with this vision.

Further, present day economic situation of the country poses threats, expected revival will bring in lots of opportunities for growth. With various infrastructure facilities lined up both in private and public sectors including nuclear power and water, across the country, the management envisages robust demand for its products especially steel. The company has emerged stronger in the last five years and is well set to capitalize on growth prospects as they arise.

V. RISK AND CONCERNS

According to the IMF, risks to the above forecasts remain on the downside, and are likely to be influenced by how the pandemic is contained. Health, economic and trade risks remain prevalent. Development of vaccines, norms of social distancing, and productivity gains from the emergence of differentiated models will determine the actual outcomes.

Delays in infrastructure development, availability of skilled manpower, volatility in global economy are some of the major risks and concerns that have to be addressed. All these have an impact on the operations of the company.

The spread of Covid-19 and the resultant lockdowns imposed by the authorities will also have impact on power segment of the Company. Foreseeable business impacts are: (a) reduction in demand for electricity; (b) reduced collection efficiency causing non-collection of outstanding dues; (c) incurrence of costs on labour and employees not fully utilised; and (d) regulatory response to the pandemic causing reduction in profits.

The company is conscious of the risks involved and has put in place a mechanism for minimizing and mitigating the same. The process is reviewed periodically.

VI. INTERNAL CONTROL SYSTEMS AND ITS ADEQUACY

The company has proper and adequate system of internal controls commensurate with its size and nature of operations to provide reasonable assurance that all assets are safeguarded, transactions are authorized, recorded and reported properly and applicable statutes, the code of conduct and corporate policies are duly complied with.

VII. FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

During the year under review, the Company has achieved a Sales Turnover of Rs.73598.85 lakhs which was lower by 12.65% over last years turnover of Rs.84255.64 lakhs. The Comparative performance of major financial parameters during the financial years 2019-20 and 2018-19 is given below:

(Amount in lakhs)

Particulars 2019-20 2018-19
Sales Turnover 73,598.85 84,255.64
Other Income 65.69 656.00
Total Income 73,664.54 84,911.64
Profit before Interest, Depreciation, exceptional/abnormal items and Tax (EBIDTA) 3,406.70 4,056.78
Less: Interest 23,368.62 23,575.42
Less: Depreciation 2,507.88 2,481.28
Profit before Tax (PBT) before exceptional / abnormal items (22,490.66) (21,999.92 )
Less: Exceptional items - 240.76
Profit before Tax & OCI (22,469.60) (22,259.28)
Profit After Tax (22,490.66) (22,240.68)
Networth (61,281.89) (38,791.22)
EBIDTA to Net sales (%) 4.63 4.81
PAT to Net worth 0.37 0.57
Debtors 23,651.37 26,924.38
Debtors Turnover (In days) 117 117
Inventory 9,944 9,775
Inventory Turnover (In days) 49 42
EBIT 899.02 1,316.14
Particulars 2019-20 2018-19
Interest Coverage Ratio 0.04 0.06
Current Assets 37,050.79 41,275.95
Current Liabilities 1,03,326.46 99,891.16
Current Ratio 0.36 0.41
Debt 1,15,624.20 1,00,820.63
Debt Equity Ratio (189) (2.60)
Operating Profit Margin (%) 1.22 1.56

The Operating Profit margin of the Company has also decreased during the current year due to decline in volumes.

VIII.MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT, INCLUDING NUMBER OF PEOPLE EMPLOYED.

Your Company believes that Human Resources are the driver to its continued success by helping to meet the challenges of providing quality products to the customers across the length and breadth of the country and penetrating key markets abroad. In order to strengthen its human capital base, your Company continues to invest in human resources by retaining and developing its existing talent and also attracting competent and talented manpower across functions.

Your Company maintained cordial and harmonious Industrial relations in all our manufacturing units. Several HR and industrial relations initiatives implemented by the Company have significantly helped in improving the work culture, enhancing productivity and enriching the quality of life of the workforce. All the above initiatives have contributed significantly to achieving and maintaining the market leadership, your Company enjoy today. The total employee strength as on 31st March, 2020 is 602.

IX. CAUTIONARY STATEMENT

The above Management Discussion and Analysis describing the Companys objectives, projections, estimates and expectations may be "forward looking Statement" within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Companys operations include external economic conditions affecting demand/supply influencing price conditions in the market in which the Company operates, changes in Government regulations, statutes, tax laws and other incidental factors.

By Order of the Board of Directors For Tulsyan NEC Limited

Sd/-
Lalit Kumar Tulsyan
Place: Chennai Executive Chairman
Date: 15-09-2020 DIN:00632823